La Tasca: unloved and undervalued

It feels as though the public life of La Tasca, the quoted casual dining group, is still waiting to happen. What is fundamentally a good story is yet to reach the square mile, it would seem. Having listed on AIM in February 2005, the company's share price has not travelled very far from its 110p debut. The price is currently 133.5p, following a 3% rise that accompanied a trading update last Friday. Shares in the company trade at a material discount to quoted rivals. Based on 2007 earnings the company trades on an enterprise value multiple of about 7x compared to The Restaurant Group, which is on 9x and Clapham House, which is up at 10.5x. The question is why? What the company described as a short-term 'blip' in the summer during the World Cup, which led it to warn on profits, cannot have helped, although it barely touched the share price, which has for last 18 months traded between 120p and 145p. That the company does not disclose like-for-like sales is clearly an issue, one that appears to be hampering the share price. The management team, led by James Horler, and its advisers, argue that like-for-like is not an appropriate measure for a business that is opening 14 restaurants a year from a base of 70. They prefer to focus on return on investment (ROI). La Tasca aims for 26% ROI and is currently achieving 28%. It is a moot point, and investors would prefer to see both measures, and probably a few more besides. There is also the issue of La Tasca's key growth drivers, which have changed since it listed. Back then the future was about the La Tasca brand - and that was the story investors bought into. Now the future is still about La Tasca, but it is also about America, La Vina and Sam & Maxie's too. Characteristics that should be considered virtues - ie multiple growth avenues - seem to be treated as anything but. It is almost as if the market is discounting everything else but the La Tasca UK business in its valuation. To my mind, it seems sensible to be planning the future of the company beyond the 100 or 150 La Tasca opportunities there may be in the UK, now, rather than in a few years. Although higher risk, America is profitable and the potential prize is huge. A joint venture with an established US operator or property company could take the concept across the vast country. La Vina is essentially a straightforward variant of the La Tasca brand - a slightly more premium offer that appeals to an older, more affluent customer. Sam & Maxie's is positioned in a market segment that Horler knows intimately, having built up TRG's Frankie & Benny's from five sites to 63, and the company can be expected to win. Any doubters should visit the recently opened Milton Keynes restaurant. The key question is does this business really deserve to trade on such a material discount to its peers? It is in strong growth, in a growing market and is a business that probably has one of the highest free cash-flow yields in the sector. One way or the other La Tasca will be fairly valued. If the market doesn't do it, private equity will. It is becoming an obvious target. There are many past examples of private equity seizing on unloved public companies. Novus Leisure, or Urbium as it was then, was highly undervalued by the market before Electra Partners took the business private in 2005 at double the market's assessment of its worth. Inventive Leisure followed Novus off the market last January, with Alchemy Partners paying a 45% premium to the market's valuation. Although he would never admit it, either publicly or privately, I would be surprised if Horler was not giving serious thought to his options. There would be no shortage of buyout firms ready to back his management team. There is also the prospect of consolidation activity. This is a market that is facing the same cost pressures as the pub industry, yet out of a universe of 20,000 UK restaurants, the biggest restaurant group has 500. Cinven, with an agreed £900m offer for Gondola, clearly has one eye on consolidation and will surely look to supplement the business with higher-growth profile brands. Using the take out multiple for Gondola of 10.1x ebitda would imply a take-out price of 185p for La Tasca. There is also Tragus, which may opt to use its paper to buy La Tasca if it gets its float away in Q1 next year. Ultimately, my money says that people will buy into the La Tasca story. It just may not be via the public markets.